Wireless Industry Analyst

So far, I have presented an argument for why Interdigital stands to gain from the iPhone. Early this fall, the company signed a 7-year licensing agreement with Apple. Here is my interpretation of the license –

• The license is retro-active to the day one of the iPhone. This implies that Apple is also paying for 2G technology licensing. So, the $2 million increase in its guidance around September (which analysts speculated was due to the Apple deal) was from licensing 2G technology alone.
• Interdigital has traditionally used the flat-licensing fee model. This has perhaps led analysts to interpolate the $2 million. They now speculate that the company’s earnings per quarter from Apple will be capped at $2 million thus yielding $56 million over the 7-years of the license agreement. Fair enough! But the catch is that with the 3G iPhone, Interdigital not only gets a flat licensing fee (per its IP licensing model) but also makes a PER UNIT ROYALTY for every Infineon platform sold. Besides, the licensing fee for 3G is also likely to be higher as it encompasses both 2G and 3G IP.
• Here are some rudimentary calculations I came up with. If Apple gets 1% market share and sells one 3G iPhone for two 2G iPhones it sells in 2008, then at $2 per handset, Interdigital can make $8 million for the year just out of handset sales. This number can only increase with the 3G sales looking to exponentially increase in 2009 and 2010. So, for now, it is hard for me to believe that the Apple deal is worth only $56 million for Interdigital.

Well, that is my speculation! I will closely watch the company’s quarterly numbers and of course, the release of the next iPhone to see if my analysis is right.

The fourth part of my Interdigital series on Sramana Mitra's site.... Some of it is a re-cap of what I had written over three months ago here.

I concluded the last article in this series postulating that Interdigital will stand to gain not only from the licensing of essential patents to Apple but also from individual iPhone sales. To reason this out, let us take a quick look at the Infineon chipset in the current iPhone design-

The platform used was Infineon’s MP-EU. The platform itself supports UMTS (3G WCDMA FDD).

• Contrary to a myth, the current iPhone does not support 3G that can be enabled by a software switch. The chip used, SGOLD2-8876 is only capable of EDGE (a 2G enhancement). So, despite the platform’s capability, the iPhone is limited by the chips in it.
• MP-EU has Interdigital 3G protocol stack and baseband design and the King of Prussia-based Interdigital stands to get royalty for every 3G phone using the platform.

Based on this information, if Apple continues to use MP-EU for its next generation, upgrading its baseband chip alone to support UMTS, then Interdigital will immediately start to get per unit royalty. Of course, MP-EU does not support data-centric HSDPA which will give a better mobile internet experience. Infineon’s next generation chipset MP-EH supports HSDPA also and is covered under the 2006 expanded agreement with Interdigital. I think that MP-EH, along with S-GOLD3H, the HSDPA baseband solution that Infineon sampled last February is a good iPhone V2 candidate provided performance and interoperability issues are ironed out. There are at least two reasons that come to my mind when we seek to speculate on the heart of the next iPhone -

• Apple already has the MP-EU in the market and is testing it for stability and optimizing it for performance. The Marvell Wi-Fi solution had performance issues that were quickly ironed out. Similarly, Apple is conscious of the power consumption of the Wi-Fi chip and its effect on the total battery-life. I am guessing that the iPhone creators are already working to address such issues in the current platform. So, they are unlikely to prefer a new solution, at least in the short-term. In fact, in the absence of a stable HSDPA solution from Infineon, Apple may still opt to come out with just a WCDMA/UMTS version. This will require minimal changes to the current platform.
• The total cost of MP-EU and the 2 IFX chips in the iPhone is speculated at close to $16. Infineon can potentially offer Apple its 3G solution at a comparable cost (perhaps ~$20).

In summary, I speculate that Infineon will continue to be in the iPhone and therefore Interdigital also stands to gain substantially. In the sequel, I will take a quick look at my interpretation of Apple’s deal with Interdigital.

The alliance with Infineon has been a rather crucial one for Interdigital. The companies have been working together on 3G technologies in a strategic relationship since 2001. Last year, there were two important pacts that strengthened this alliance –

• Infineon licensed its GSM/ GPRS/EDGE S-GOLD 3 baseband modem and protocol stack software from subsidiary Comneon to InterDigital. This essentially allowed Interdigital to produce its own chipsets with 2G and 3G baseband modems. The agreement gives Interdigital the right to use Infineon’s 2G technology in its own modem offering or to sublicense the technology to third parties developing their own 2G/3G modem offerings. This deal facilitated the company’s ASIC plans in the 3G space. Interdigital successfully conducted initial evaluation tests on this combined 2G/3G modem with a state-of-the-art HSDPA advanced receiver solution this month. While Interdigital continues its march towards the smartphone market, Infineon will benefit from the licensing of components of the modem, the complete design, and of course, the sale of ASICs.
• In January, the two companies expanded their relationship to incorporate HSDPA development as well. Under this expanded agreement, the companies will continue the joint development of the 3G protocol stack software technology for Infineon’s 3G platforms. This agreement expanded the collaboration to include the data-centric HSDPA as well. This agreement also “amends the per-unit royalty rates to be paid to InterDigital for the sale of Infineon’s ASICs containing jointly-developed protocol stack software.”

While the first agreement gives Interdigital a foothold in the highly competitive ASIC world, the second agreement is also fundamental for its future outlook. Here is why –

• Interdigital gets a share for every Infineon 3G chip sold world-wide
• Infineon’s 2G chipsets are in today’s phones, most notably the iPhone

So, if iPhone V2 which will arrive in 2008 has the Infineon chipset, then Interdigital will stand to make money from every iPhone sold world-wide. In the sequel, I will look at why this is likely to be the case.

2007 has been a happening year for the wireless industry. Apple’s iPhone and Google’s Android are just two examples of how even outsiders want a part of this very luscious pie. 2007 was eventful for another reason – the legal battles between two American communication devices manufacturers – Qualcomm and Broadcom. I have drawn from the legal wrangling between these giants to dissect the future of Qualcomm. In the coming weeks, I hope to similarly review the fortunes of Broadcom. It will be good to start with a perspective on the company’s strengths and weaknesses.

Broadcom was started in 1991 by Prof. Henri Samueli from UCLA along with Henry Nicholas III, a former student of his. As its name indicates, it was started with the idea of selling broadband communications solutions. It is illustrative to take a quick look at Prof. Samueli’s background to understand the strengths of Broadcom as a company. He founded Broadcom to leverage his interests in digital signal processing, communications systems engineering, and CMOS integrated circuit design for high-speed data transmission systems. The company, even today, takes pride in its proprietary DSP hardware architectures, system-on-a-chip design methodologies, high-performance CMOS designs for RF, analog and mixed circuits and its custom microprocessor architectures.

The company’s strengths are especially interesting in the context of its much touted entry into the mobile space. While these strengths are imperative to the company’s success in this space, they also highlight an important weakness - the de-stressing of the theoretical underpinnings in their design and development process. Mobile wireless communications is severely constrained by power and also faces interference issues. Besides, there is and will continue to be competition for spectrum, and receiver algorithms need to be designed with that in mind. It is therefore important to understand the theory behind the system design. An ideal company needs a balance between the theoretical notions and the system design.

Broadcom has definitely sought to address this traditional weakness by roping in bright information theoreticians. Chief among them is the VP and CTO of the mobile and Wireless group, Dr. Nambi Seshadri. I have great respect for Dr. Seshadri, who in 1999 was the co-recipient of the Best Paper Award from the IEEE Information Theory Society (essentially the highest recognition accorded to information theoreticians around the world).

So, like most semiconductor companies, Broadcom’s traditional strengths are in circuit design. It perceives mobile communications as an application of its strength. With its relatively late entry into the mobile space, BRCM’s long-term interests will hinge on its successful trial and delivery on the chip announcements made this year. The success will not only be measured by price and inter-operability but also on relative performance. Therein lies the company’s uphill battle.

In the next few articles in this series, we will look at the company’s growth and businesses and how they fit into its future plans.

This is the second part of my article on Nokia's Indian presence. You can also read it from Sramana Mitra's website for which this piece was written.

As we saw in the prequel to this piece, India is a very attractive market for handset vendors. Nokia, is perhaps the best prepared to address this exploding market. So, what does Nokia have going for it in India?

By virtue of being one of the early birds and backing it up with sustained quality, Nokia once commanded about 80% of the market share. It is hence the most recognized mobile brand-name in the country.

• Its market share has eroded now to 55%. But with many other big companies like Samsung, LG, Sony-Ericsson and Motorola becoming more competitive, we should understand that 55% is still very high (in fact, higher than its global market share of about 40%). What is more is that the company has the potential to sustain this share through the revolution.
• The company has a staggering 90,000 distributors all around India. Essentially, it has its footprint in 90% of the country’s retail stores. Besides, there are 30,000-35,000 stores exclusively selling Nokia phones.
• Nokia has a manufacturing plant near Chennai, 50% of whose output is consumed internally. Surprisingly, the Finnish giant is able to sustain higher manufacturing costs in India to compete against cheaper Chinese phones.
• The company introduced phones models (Nokia 1100 and 1110) that have been doing very well in the Ultra-low cost handset (ULCH) market at around $50. While the margins may be much lower than the other higher-end phones, this has helped stem competition from the Chinese vendors apart from Motorola that was denting its share. Interestingly, world number two handset maker Samsung has consciously walked away from ULCH market. It wants to be the preferred phone for feature-phone users.
• Phone designs are customized for India. Globally designed handsets are slightly modified to suit the local needs. The Nokia 1100 has a torch and is dust-resistant in its Indian avatar.
• The company took this customization to the next level by opening a design studio in Bangalore together with Srishti School of Art, Design and Technology. The studio is set-up to explore a range of design trends and themes that suit the country and other emerging markets. The hope is also to research into usage models and its design implications.

While these points illustrate Nokia’s dominance and its understanding of the Indian market better than any other vendor, the last point highlights its adaptability. The company has, through this initiative, demonstrated its will to retain its leadership position in India.

As I mentioned in my previous article, the demographics of the Indian mobile buyer is rapidly changing. Only a company which understands this and creates a niche for itself can thrive in the next few years. On my observation of the Indian consumer, ABI analyst and friend, Shailendra Pandey says, “In India, the points of caution that you have mentioned do apply to Nokia, but at present these apply even more to other handset vendors (especially the other big four - Motorola, Samsung, LG and Sony Ericsson). This therefore again puts Nokia in a stronger position.” I will agree with him. These are the initiatives that give it the true ‘global’ label.

In August this year, Nokia announced that India surpassed U.S as its second biggest market next to China. As India’s mobile handset market grows, Nokia’s position can only get better.

Nokia (NOK) has the most global footprint in the wireless industry today. While there are several facets of the Finnish company worth discussing, I would like to focus on one of my pet themes – Nokia in India.

Let us start by getting some perspective on the Indian handset market –

• In August 2007, the number of mobile subscribers in India hit the 200 million mark. To give you a perspective, there were only 100 million subscribers in May 2006. Note also that India’s population is over a billion of which around 750 million are in the 15-64 age group. So, there is a substantial portion of the market yet to be tapped considering that the teledensity of around 20% is nowhere close to the 60’s that we see in countries such as the U.S.
• The total number of handsets estimated to be shipped in 2007 is about 80 million, which is a 33% increase from last year’s 60.62 million units. This is 7.2% of the total world-wide handset shipments for 2007.
• There are around 100,000 retailers for mobile phones in India.

Besides, there are a couple of things I noticed about the demographics of the Indian mobile customer when I visited Chennai last year.

• When cell-phones took off, it was either the executive or the jazzy college-going kid. Later, it was in the hands of every other college kid, meaning that the middle-class Indian was coming around to the fact that the mobile is after all not a spoiling influence on the kid but more a utility. Today, more and more of the conservative working class which typically eyes utility, wants to be mobile. This explains the popularity of the Ultra-low cost handsets. With a vast majority of India still rural, the profits lie in the volumes. For the subscriber-base to keep growing, this section will have to be served the phones they can afford. So while there will always be a market for costlier phones and convergence devices, the lower-end phones will play a key role.
• India is no longer two or three years behind in technology. The status-conscious urban consumer wants and gets the latest.

With these points in mind, I will, in the sequel, investigate how Nokia is positioned to maintain its leadership position in India.

I have, so far, refrained from expressing my opinions about my company, Atheros Communications (ATHR). But late last week, we announced that we will acquire u-Nav Microelectronics for $54 million that includes $15.4 million in cash and 1.28 million shares of Atheros common stock. This news has forced me out of my silence.

Firstly, I am happy that Atheros has added an extremely important strategic piece to its portfolio. I have, in my articles dating back to July, mentioned that the future of wireless is in integration-the ability of the same wireless chip or card to support multiple technologies. Qualcomm has been a traditional champion of this notion. Whether it is Snapdragon, its omnipotent chipset or its Gobi move, Qualcomm has been promoting integration around its core mobile capabilities. Broadcom, a key WLAN player, sought to expand its portfolio to include 3G, Bluetooth and completed it with GPS capabilities from Global Locate earlier this year. I had written that other semiconductor companies will hence have to acquire this technology through internal development, acquisitions or strong alliances. Today, I am glad that Atheros understands this as it positions itself as a future champion of the wireless industry. With its leadership in PC WLAN market and exciting solutions in Bluetooth and mobile WLAN, it is not surprising that Atheros got the “Most Respected Emerging Public Fabless Company” award from FSA this year. The GPS move can only help strengthen its future outlook.

Secondly, it signifies a bigger consolidation of the wireless industry and its various components. While I will not glorify this acquisition, I do wish to emphasize that the future survival of a wireless company is contingent on its portfolio expansion. These companies can no longer afford to be one-trick ponies. Thus, we are likely to see some significant trends through the next couple of years.

• Mobile companies shopping for other GPS companies: The problem is that not many small players with competitive solutions are available in the market today. Few names that crop up include SkyTraq, CellGuide, NemeriX etc. It will be interesting to see players like Marvell, NXP and Freescale get GPS capabilities.
• Companies may exit 3G space: A lot of the GPS action has taken off along with 3G technologies. The consumer also wants powerful devices. With the market slowly consolidating on the mobile side, players like Qualcomm and TI will thrive while Broadcom, STM and Infineon (each of whom have GPS in their kitty) could take a part of the pie, especially with interest from vendors such as Nokia and Apple. For the others, it is a do-or-die situation. If they cannot acquire GPS capabilities, they cannot be competitive and hence risk losing out in this space. This in turn implies a further consolidation of the market with companies announcing their exit slowly.
• More technology integration: We have a list of mobile broadcasting standards that fall in this list. SiRF, for example, complements its GPS core competence with DVB-H capabilities it acquired through TrueSpan in 2006. Qualcomm’s Snapdragon platform can integrate most broadcasting standards. We also have integration across multiple standards as demonstrated by Gobi.

Thus, the next two years will be fairly crucial for a lot of the wireless players. As for Atheros, at a price of $54 million, it won itself an entry into an important technology market, a good product, good engineering expertise and a ticket to the wireless future.